Capital One announces plan to buy Discover

Capital One announced a definitive agreement under which the company will acquire Discover in an all-stock transaction valued at $35.3 billion.

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The merging of two of the biggest U.S. credit card companies is underway. Capital One announced a definitive agreement under which the company will acquire Discover in an all-stock transaction valued at $35.3 billion.

Under the agreement, “Discover shareholders will receive 1.0192 Capital One shares for each Discover share, representing a premium of 26.6 percent based on Discover’s closing price of $110.49 on Feb. 16 with Capital One shareholders owning approximately 60 percent and Discover shareholders owning 40 percent of the combined company.

“Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies,” Richard Fairbank, founder, chairman and chief executive officer of Capital One, said. “Through this combination, we’re creating a company that is exceptionally well-positioned to create significant value for consumers, small businesses, merchants, and shareholders as technology continues to transform the payments and banking marketplace.”

While Capital One is a credit card issuer, Discover is both a credit card issuer and a payment processing network, which is what Capital One needs to authorize transactions. Merging with Discover will allow Capital One the opportunity to end it’s relationship with Mastercard and Visa processing network and use Discover’s network, according to a press release.

“The transaction with Capital One brings together two strong brands with enhanced ability to accelerate growth and maximizes value for our shareholders, enabling them to participate in the tremendous upside of the combined company,” Michael Rhodes, CEO and President of Discover, said. “This agreement underscores the strength of our business and is a testament to the hard work of Discover employees. We look forward to a bright future as part of the Capital One family and to providing expanded opportunities for our loyal customers.”

The Consumer Financial Protection Bureau (CFPB) said that the lack of competition “likely contributes to higher rates at the largest credit card companies” and warns of future “service charges and other customer-related fees” after Capital One took in nearly $1.7 billion from such charges and fees.

“Banking giants like Capital One have long exploited the lack of competition to price-gouge families with predatory credit card interest rates and hidden junk fees,” Liz Zelnick, director of the Economic Security & Corporate Power Program at Accountable.US, said. “Even less competition under this merger means these companies will have less incentive to check their greedy practices that nickel and dime consumers into the billions of dollars.”

The agreement will need to clear regulatory rules, and be approved by the shareholders of both companies along with seeking approval from federal regulators.

“Federal regulators’ appetites for bank mergers is shrinking under the Biden administration, and smaller deals have been abandoned because of regulatory friction,” Aaron Hurd, CNET Money Expert Review Board member, said.

As of now, nothing will change when it comes to Capital One and Discover credit cards.

“Federal regulators should take a hard look into whether this deal runs afoul of antitrust rules at the expense of consumers,” Zelnick said. “It’s a reminder why the Biden Administration’s ongoing efforts to crack down on excessive and hidden junk fees from big banks are a critical step towards lowering costs for Americans.”

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